From Recession to Depression

If you credit Austrian School Economic Theory, which I certainly do, you’re forced to believe that the business cycle exists. The business cycle is driven largely by government intervention in the economy, in the form of taxes, regulation and, most importantly, currency inflation. These things give false signals to businesses and investors, which cause distortions in the market, and misallocations of capital.

When, inevitably, the errors start to be corrected, the result is an economic downturn. It will be called a “recession” if the government succeeds in preventing widespread bankruptcies and unemployment through one more dose of inflation.

Or it will be called a “depression” if today’s economic tempest slips out of the government’s control. From a financial point of view, a depression is a period when the distortions of an inflationary boom are liquidated — a mass die-off of the economically misbegotten. From an economic point of view, it’s a period when the general standard of living decreases significantly.

The point is that the more highly taxed, regulated, and inflated an economy is, the more likely that it’s eventually going to experience a real depression.

Perversely, the more control a government has, the longer it can put off the day of reckoning. But the longer the artificial structure is propped up, the bigger the mess will be when it eventually collapses. From my point of view, what will happen next is almost written in stone. The only real question is: When?

In 1980-82 things almost did go over the edge. But the recession was serious enough, and some subsequent extraneous positive events (the collapse of the USSR, the coming of age of China and now India) were significant enough to pull things out.

But now, more than a generation after the last serious crisis — and four full generations after the Great Depression — I think there are lots of reasons to be afraid. Very afraid.

Am I predicting the Greater Depression may be upon us? Let me preface my response with a disclaimer. I’m not a fortuneteller. But my gut feel is: Yes. I’m not going to mount all manner of statistics to buttress the assertion. My point here is to draw your attention to the fact that there’s a lot that’s likely to go wrong besides the central problem of the business cycle, a problem that is now evidenced in the collapsing housing sector and all the pain associated with that collapse.

The “other” problems now include the Forever War against Islam, Peak Oil, increasing political control over virtually all aspects of life, the potential for social unrest (within the U.S. Mexican community, for instance), the historically high level of foreign holdings of U.S. dollars, a rise in nationalism and protectionism, etc. While not always obvious, all of these things are related, so it’s likely that when one of them starts running out of control, so will the others.

What will, in fact, happen? Nobody knows, including me. But I’m quite afraid we’re in for truly stormy weather in the next few years. Most people aren’t adequately, or even at all, aware of this prospect.

I suggest you stay with the approach we advise that has a foundation in gold and carefully selected gold stocks.

As I am in for the long haul at this point, selling only reluctantly and when absolutely necessary to keep Caesar mollified or for portfolio rebalancing, I still view any weakness positively.

Making mid-stream adjustments to your portfolio based on these buying opportunities is important. Being bold when others are timid can make a big difference.

In my opinion, gold isn’t just going through the roof in the next few years. It’s going to the moon. And gold stocks are a leveraged way to capitalize on it.

Doug Casey
Chairman, Casey Research, LLC
February 4, 2008